Too much wealth tied up in real estate can hurt your retirement, report suggests

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Canadians heading into retirement are in a great position, said no one ever.

But even by this usual standard of negativity, a new report on retirement by Deloitte Canada is a stunner. It says that 55 per cent of people aged 55 to 64, about 1.7 million individuals, will have to make lifestyle compromises to have a comfortable retirement. Near-retirees are too dependent on their houses for wealth, they invest too conservatively and they don’t have access to the advice and investing products they need.

The Deloitte reports includes some suggested remedies, including more options for people tap into their home equity to finance retirement. But the takeaway for people retiring in the next few years can be summed up follows: Find a way to save more, or scale back your retirement lifestyle expectations.

The report is based on a study of 4,000 households of people between 55 and 64 who are heading into or already in retirement. Fourteen per cent of these households are in great shape for retirement, and 31 per cent are low-income households that will find their employment income largely replaced by the Canada Pension Plan, Old Age Security and possibly the Guaranteed Income Supplement.

Eighteen per cent can afford retirement, but will need to lower their lifestyle expectations, while 37 per cent are at risk of not having enough to get by, even when including personal savings, government pensions and GIS payments.

How much does retirement income depend on investment returns?

The Deloitte report demands attention because, refreshingly, it comes from a consulting company and not a bank or investment company angling for more customers. The report is also original in that it acknowledges the impact of expensive housing on retirees, and debt as well.

About 25 per cent of retirees have a mortgage, the report says. “Sure,” home-owning, near-retirees are saying at this point. “But at least I have my home equity.”

The Deloitte report is not sympathetic to this line of thinking. First off, it notes that home equity has traditionally been hard to access as a source of money to pay costs like basic living expenses in retirement.

“There also appears to be a prevailing taboo around using real estate to fund retirement,” the report says. “We found that only 17 per cent of near-retiree Canadian households would consider using their real estate to supplement their retirement income.”

Reverse mortgages are one option for tapping into home equity, but the report says the fees involved affect their appeal. Also, there are only two companies providing this product on a large scale. To improve public confidence in reverse mortgages, the reports suggests that regulators introduce rules governing how these products are managed.

Despite its questionable utility as a source of retirement income, home equity’s share of individual wealth has grown to 46 per cent in 2019 from 38 per cent in 1999. This growth rate surpasses private pension and non-pension assets.

Rising home values explain this trend in part, but price growth has either stalled or turned into price declines in some cities recently. Compounding this, the Deloitte study notes a tendency for people to overestimate the value of their real estate.

A unique aspect of the study is its acknowledgement of the effect on retirement saving of supporting adult children financially. Here, again, housing is a factor. In addition to helping their kids with money for down payments, parents are providing money to cover the costs of owning a home and covering the mortgage payment increases many young buyers have experienced since interest rates began climbing.

Would-be retirees: Should you start your CPP pension before year-end or wait until 2024?

A rough, Deloitte-suggested diagnostic for your retirement readiness: To maintain a modest lifestyle until the average life expectancy of 82, near retirees should have at least $340,000 in savings, pension money included. Of course, many people will live longer than that and require substantially more savings to cover long-term care costs.

One more step suggested by the report is to check the mix of stocks and bonds in your retirement investments. A conservative approach with a preponderance of bonds can reduce the volatility of your portfolio and the pain of stock market declines, but it also reduces your benefit from stock market gains.

A few other recommendations apply to employers and the financial industry, and they’re worth highlighting. One is to create more investment products designed to pay income in retirement. Two current such products are the Vanguard Retirement Income ETF Portfolio (VRIF-T) and the Purpose Longevity Pension Fund.

Also, employers should do more to encourage participation in their retirement savings programs. Mandatory participation would be controversial, but also serves the greater good.

I’m tracking the extent to which parents are helping their adult children with housing costs. If you gave your kids money for a home down payment, to cover rising mortgage costs or for other housing-related purposes, please take this quick, anonymous survey.

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